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Rice’s Price Could Head Sharply Higher (S. Constable, Barron)

Observers of the rice market worry that there could be a repeat of the food crisis of 2008. If there is, prices could soar from current depressed levels.

In 2007-08, a combination of export restrictions from major rice-producing countries and speculative investment purchases caused shortages of the grain. Consumers across Asia panicked, buying and hoarding whatever rice was available, while Haiti saw riots.

In the U.S., certain grocery stores limited rice purchases.

As the supply situation worsened, prices catapulted to more than $24 per hundred pounds by April 2008, from about $13 near Thanksgiving 2007.

This time, prices have been on an almost continuous slide for the past 17 months, discouraging growers even as demand increases. Rice is trading around $10 per hundred pounds, down nearly 40% from the end of 2013.

“Current levels of supply against demand are very similar” to the food crises of 1972-74 and 2006-08, says Shawn Hackett in a recent edition of the Hackett Money Flow Report.

The stocks-to-trade ratio, a measure of how much rice is in storage relative to how much is shipped around the globe, is 225%, a tad lower than the 233% seen in 2007-08 when prices started to surge, according to the Firstgrain Rice Market Strategist newsletter. The lower ratio means smaller stockpiles.

“Rice production is projected at a new record,” the U.S. Department of Agriculture reported in May. But “consumption is forecast to surpass production for the third year in a row, drawing down stocks to the lowest since 2007-08.”

TIGHT INVENTORY ISN’T the only issue. Short positions in the futures markets by speculative traders hoping to profit from further drops in the price have grown dramatically. In late-May, the number of bearish hedge funds and other money managers was more than 300% larger than those betting on higher prices, according to data from the Commodity Futures Trading Commission. That’s up from 49% more speculative shorts than longs a year earlier.

Big short positions can be bullish for the price because sooner or later those short positions will need to be closed out. When that happens, the speculators must buy an equivalent number of contracts, and as they do, it’s likely that rice prices will rally.

There’s more: Hackett sees unusual weather harming crops. Specifically, he pinpoints a “super” El Niño weather system in the Pacific Ocean as a potential problem. It “has the potential to cause production setbacks at a time when buffer stocks do not exist to offset them,” he writes, pointing to the major rice-producing countries of India, Indonesia, and the Philippines as particularly vulnerable to crop difficulties.

El Niño tends to cause droughts in the summer and floods in the fall from typhoons in all three countries, which produce about a third of the world’s rice.

Low prices for rice and bad weather are also causing some U.S. growers to reduce their planting. Firstgrain estimates that the acreage for long-grain rice in the U.S. will drop 5% this year.

Rough rice for July, the most actively traded contract, recently traded at $9.945 a hundred pounds on the Chicago Board of Trade.